Retailers’ Worries About Impact of Coronavirus Shift From Supply to Demand

What started as a supply chain problem is changing with the souring economic climate

empty grocery store shelves
Products such as hand sanitizer are flying off the shelves, but demand is temporary and the retail forecast is in doubt.
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Key insights:

When it comes to the coronavirus, retailers have had to face a host of new challenges. Now that factories are coming back online in China, stores must adjust to how consumers are responding to the spread of the contagion, which the World Health Organization declared a global pandemic on Wednesday.

While supply was initially the concern, it may be a moot point if there’s little to no demand. “The demand piece is tricky,” said Per Hong, a senior partner in the operations practice of management consulting firm Kearney.

Although purchases of specific products such as hand sanitizer, bottled water and toilet paper are increasing, even selling out at some locations, the desire for discretionary items is declining. Events are also being canceled, and consumers are beginning to work from home en masse, as well as avoiding public places such as restaurants and theaters.

“The only products that will do better are some staples,” said Sucharita Kodali, principal analyst at Forrester. “Only some shelves at Walmart are empty—pasta has been ransacked, but oddly pasta sauce is full. Tea bags seem to be gone. But there’s plenty of Advil and toothpaste. It’s all very strange.”

By Thursday, numerous accounts of empty shelves were reported at retailers ranging from Costco to Target and BJ’s Wholesale Club. But spikes in sales of essentials in the short term are likely to result in shoppers buying less of those products in the future, Hong said, as consumers use their stockpiles.

On the other hand, brands such as Ralph Lauren and Nike are lowering their sales guidance figures, Hong pointed out. Even distillers such as Diageo and Brown-Forman are warning investors about future performance because of lower consumption of liquor at restaurants and bars.

“Travel, hospitality, luxury, restaurants and, yes, discretionary purchases will all do poorly until coronavirus fears subside, the market picks up, and uncertainty is less prevalent,” Kodali said.

Accordingly, don’t expect a shortage of footwear, apparel or toys, said Andrea Weiss, CEO of retail consulting network The O Alliance. “Maybe Nike runs out of a style,” she interjected, but otherwise there remains plenty of inventory.

One area of concern is the supply of generic pharmaceuticals, Weiss noted.

For now, the extent of demand in the longer term is unknown, she said, likening the current impact of the coronavirus to a natural disaster such as a hurricane.

Uncertainty is the new normal

Part of the conundrum is that much remains unknown about the coronavirus, and much is still being learned.

“It’s all fluid. There are no shortage of opinions, but we have a dearth of facts. The closest parallel is Y2K, but that was much ado about nothing,” Kodali said. “Maybe the virus will be better than expected, maybe it will be worse. Who really knows?”

While declaring the coronavirus a global pandemic, the WHO has found it can be controlled with the right policies. However, patients in China who were discharged after recovering from COVID-19, the pneumonia-like disease caused by coronavirus, later tested positive for it.

In the U.S., meanwhile, there are concerns about the response of the Trump administration and the Centers for Disease Control, such as the slow rollout of testing for the virus.

Apart from how to keep people healthy, key economic questions remain unanswered as well, such as whether the plummeting stock market or a drop in consumer spending, which accounts for 70% of the economy, trigger a recession? “The strength of the economy depends on consumption,” Hong said.

Major indices, namely the Dow Jones Industrial Average, are deep in the red. By the close of trading Thursday, the Dow alone was down more than 2,300 points, unmoved by rate cuts by many central banks.

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